Two of India’s elder statesmen could be watching the battle for control at Bengaluru-based software services firm Mindtree, with local engineering giant Larsen & Toubro having mounted a hostile — or unsolicited — takeover bid. Pranab Mukherjee and Manmohan Singh were impacted in different ways by what was possibly the country’s first major hostile takeover attempt.
In 1983, NRI businessman Swraj Paul bought into Delhi-based firms Escorts and DCM under a new scheme that allowed NRIs to invest in Indian companies. When he acquired more than the holdings of the promoters, Indian business houses sought the support of Mukherjee, then Finance Minister, to prevent a takeover and to frame a policy to protect established Indian companies. The matter reached Parliament, a legal battle followed, and the government eventually went in for a mediation to convince Paul to sell his shares back to the promoters, the H P Nanda family (Escorts) and the Shri Ram family (DCM).
Mukherjee has recounted all this in The Turbulent Years. On the other hand, Manmohan Singh, who was then RBI Governor, has referred to serious disagreements between him and Mukherjee. “Sometimes there was tension. For instance, there was that famous case of Swraj Paul’s investments,” Singh’s daughter Daman Singh quotes him as saying in her book.
What Singh was referring to was the attempt to browbeat the RBI into approving the deal. In a rare instance, the government directed the RBI to carry out its instructions, saying that the central bank was only an agent for implementation of a government scheme, which Singh protested.
Then & now
Over four decades later, an aggressive attempt at gaining control of a company will hardly bother political leaders, especially in an election season. India’s corporate sector and economy have changed drastically over the years, with liberalisation, competition, changes in governance practices, and investors from overseas. Rather than the government explicitly stepping in, securities market regulator SEBI is empowered to regulate takeovers and mergers of publicly listed companies. India now has takeover rules or regulations, the first ones approved in 1994 and tweaked a couple of times since.
The rules do not quite define a hostile takeover, except to say that it is broadly an unsolicited bid or attempt by a person without any arrangement or a memorandum of understanding with the persons currently in control of the targeted company. Hostility (if the word could be used) arises in the case of the attempt on Mindtree as its founders Subroto Bagchi, Krishnakumar Natarajan, N S Parthasarathy and Rostow Ravanan, who jointly control over 13 %, have opposed L&T coming in, saying it is a threat to the unique organisation that they have collectively built over 20 years and with a differentiated corporate culture.
The trigger for all this is the decision of the firm’s biggest shareholder — V G Siddhartha, promoter of Cafe Coffee Day and son-in law of former Karnataka Chief Minister S M Krishna — to exit by selling his 20.4% share to L&T.
India & the world
Globally, takeover attempts face resistance on account of cultural differences between the targeted company and the acquirer. Yet it is far more common outside India, with many viewing such changes as a disciplining mechanism and also beneficial to minority shareholders because the stock price vaults.
One reason why such takeover attempts in India have been few may be that domestic institutional shareholders prefer to stay put. If a large company was the target and the acquirer was a foreign investor, these shareholders might be concerned about being caught in a crossfire and about the political economy. Hostile takeovers are also relatively difficult in India because of constraints on funding. In the West, debt-funded takeovers are the norm — Leveraged Buy Outs or LBOs were made famous in the RJR Nabisco case — but in India, the government and the RBI bar banks from such an activity. The rationale is that the limited resources available with Indian lenders are best used for creating new assets, which can create more jobs, while hostile acquisitions can potentially reduce jobs.
When attempted, hostile takeovers have rarely succeeded in India. An undivided Reliance attempted to take control of L&T in 1989, having bought in though a transaction involving a Bank of Baroda subsidiary. Dhirubhai Ambani took over as L&T chairman; Mukesh and Anil Ambani came on board.
With influential shareholders involved, the L&T management mounted a push-back and Reliance had to exit by selling their shares to the Birlas, who too exited later. The government stepped in when British American Tobacco was attempting to take control of ITC. Other hostile attempts include that by ICI for Asian Paints, and by India Cements for Raasi Cements.
The takeover regulations in such cases stipulate that the acquirer will have to make an open or public offer for buying out 26% from the minority shareholders (in Mindtree). To achieve this, L&T will need to depend not just on such shareholders but also on institutional shareholders such as investment institutions and overseas investors. It has offered to buy 31% at Rs 980 a share, which will mean spending Rs 5,027 crore. The other possibility is that the existing promoters manage to bring a strategic partner — known as a white knight for stepping in to support the incumbent promoters — or raise funds to buy back shares.
The Mindtree board will meet Wednesday even as it taunts L&T as to why it cannot build its own IT firm. Proxy advisory firm Institutional Investor Advisory Services also wants Mindtree’s independent directors to provide guidance to shareholders on whether or not L&T’s open offer is in the software company’s long term interest.
This hostile bid does not have a desi-videshi twist. When the Swraj Paul takeover issue came up in 1983, Mukherjee told Parliament that no one could provide a guarantee to Indian business that they could “rule in perpetuity”. “As long as they maintain a proven record of their management and they enjoy the confidence of the shareholders, they are safe,” he had said.